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Five Key Lessons for Latin America and the Caribbean from the Great Recession

December 19, 2011

As 2011 comes to a close, the global economy is facing yet another economic slowdown. Based on household survey data from 2010 and labor market indicators through the third quarter of 2011, the World Bank draws key lessons from the impact of the Great Recession of 2008/2009 and the quick recovery on Latin America and the Caribbean’s poor and explores their implications for poverty reduction in the region going forward.

According to the new brief, On the Edge of Uncertainty: Poverty Reduction in Latin America and the Caribbean during the Great Recession and Beyond, even during the recession Latin America managed to reduce poverty levels. Then, as it quickly rebounded in 2010, poverty dropped even faster -- by 12.6 million -- and continued to decline throughout 2011. Today, we can safely say that moderate poverty in Latin America has dropped by 73 million since 2003.

“Thanks to a combination of increases in labor income and public and private transfers, we didn’t see poverty grow during the worst of the global crisis and have in fact witnessed reductions in Latin America during the past three years,” said Rodrigo Chaves, World Bank Sector Director for Poverty Reduction and Economic Management in Latin America and the Caribbean.

“While we continue to hope that the global economy will recover, we need to be vigilant and prepared for all scenarios.”

Here are five lessons to be drawn from the region’s recent experience that should help shed some light on how to best prepare.

Rising income and a more equal distribution of income were behind the falling poverty in 2009 and 2010. Labor income accounted for 50 percent of poverty reduction, non labor income (public and private transfers) accounted for 24 percent, and a combination of labor and non labor income accounted for the 26 percent left. Therefore, households receiving both increases in labor and non-labor income saw the greatest poverty reduction during the crisis.
The urban poor suffered most during the 2009 crisis and benefitted less during the 2010 recovery. This suggests that the labor market in poor urban areas remains less dynamic than in poor rural areas.
In 2010, growth rates had a strong correlation with poverty declines in the Southern Cone and the Andean regions (poverty declined by 3.7 and 1.9 percentage points, respectively). In contrast, in Mexico and Central America poverty decreased by 1.3 percentage points, despite a more than 4 percent increase in GDP per capita – suggesting that poor households did not benefit much from the expansion and/or that vulnerable households continued to drop below the poverty line after the crisis.
While women’s wages played a key role in keeping the poor afloat during the 2009 crisis, it was men’s wages that helped in the 2010 recovery. What’s more, it was households with dual earning that had the best chance to come out of poverty during the crisis.
While poor households with children experienced the greatest improvements in well being during periods of growth, they also suffered the most during economic contractions, suggesting that these households were less likely to have dual earners and that safety nets are still leaving out some of these households.
The story of poverty reduction in Latin America in recent years has been a happy one. Still, there are areas that require close attention particularly in the midst of global uncertainty. Recent experience tells us, for instance, that the poor in Mexico and Central America may be particularly vulnerable.

Also at risk are urban households with a single wage earner and small children. Going forward, countries have to continue to closely monitor the skills required by labor markets, adopt policies that can help less favored households succeed in the labor market, and explore options to expand female labor market participation to help diversify household income. Governments may also wish to expand programs to the urban working poor who were vulnerable to losing their livelihoods in the last crisis.